Traders mostly use it to analyze multiple stocks with their opening and closing value to predict their movement. This is done with the help of resistance value and support value (basically the highest and the lowest the stock touches during the trading session). It can help determine the entry and exit position in the trade during different time frames and lower the risk of loss.
A pivot point is a technical analysis indicator or set of computations used to determine the market’s overall trend. The pivot point is just the average of the preceding day’s high and low and closing price. Trading above the pivot point is considered bullish, while below is deemed to be bearish.
There are four main ways to calculate for pivot points:
Different traders take the help of the Pivot points to understand the stock’s status and trade in the market accordingly. Traders can also use pivot points to understand which levels must be broken for a strong entry point in the trade. Pivot points are easy to understand and accurate to a certain extent, where the trader can determine if there will be any price fluctuations.
Pivot points are used to identify the overall trend of the share – where the range above the point is considered an uptrend, while in the opposite, a range below the pivot point is viewed as a downtrend. It is not entirely accurate, but the result is very close to reality with the value of support and resistance.
Candlestick pivot point strategy: Pivot points are most effective on candlestick charts as they give the best idea on the candles, which determine the bullish and bearish trend with their patterns. One can have a better idea of the nature of the trade after using this method.
Support and resistance pivot point strategy: A trader can estimate the entry point using the pivot points for Support level 1, Support level 2, Resistance level 1, and Resistance level 2. In trading, it’s always best to follow the trend, thus in a broad upswing, a trader would look for pullbacks to Support level 1 or Support level 2, and in downtrends, they’ll try to sell at retracements to Resistance level 1 or Resistance level 2.
Day Trading Using Pivot Points: Intraday trading is the type of stock trading where you buy and sell the stock on the same day before the trading session ends. It is a risky yet fast and profitable option due to the fluctuation in the share price. Hence, it is the most popular option with traders. There are many ways to determine the approximate position of the share, but the most preferred method is pivot tables and pivot points to make accurate trading decisions.
The basic rule of the pivot point is that if the calculation of the average is higher than the pivot, then the stock is higher in value and bullish in trend. At the same time, if the average calculation is lower than the pivot point, then the stock is lower in value and bearish in trend.
And the pivot point in the centre is the main point.
Pivot points are determined by the OHLC (Open, High, Low, and Closing) of a stock price from the previous day.
Where the calculation of Pivot point is – (High+Low+Close)/3
While the resistance and support points are calculated in the following manner –
Resistance 1 = (2xPP) – Low
Resistance 2 = (PP – S1)+R1
Resistance 3 = (PP – S2) + R2
Support 1 = (2xPP) – High
Support 2 = PP – (R1 – S1)
Support 3 = PP – (R2 – S2)
Resistance is the maximum level the stock may reach in a day in terms of value, while the support is the minimum level the stock may fall in a day in terms of value. The seven points together give the total concept and the pivot point calculation, which is further used in two ways to determine the market situation.
1) Pivot level breakout: Pivot level breakout uses a stop limit (a price pre-set to mitigate the risk of loss) and then trades when the stock price is above the pivot point. If the trend is bullish, one should hold the position for the whole day, but if the trend is bearish, one should hold onto the position for the short trade. The best time to use this trend is in the morning, where the chances of loss are less, and the breakouts are more.
If the market price rises to higher highs, entry orders placed above resistance will be ready to buy. Orders to sell below the S4 line of support, on the other hand, will be activated if the market moves to lower lows. Traders who want more confirmation should wait for a candle to close before triggering a market order. The idea is to enter the market when there is a new price spike, which usually coincides with economic news.
2) Pivot Point Bounce: The approach is a trading method that uses daily pivot points. When the close candle is more than the Pivot Point Zone, buy trades are entered, and sell trades are entered when the close candle is less than the Pivot Point Zone. The system trades the price as it moves forward and then alters it by bouncing off any other pivot points.
It works on the principle of reversal, which means that when a price reaches a pivot point for the first time in each direction, it reverses the trend.
The following are the steps to understand how traders can trade with the help of the pivot point bounce strategy.
Step 1: Choose a stock and add the daily pivot points, and open the OHLC (Open, High, Low, and Close) bar chart for that.
Step 2: Follow the pattern and keep a tab when your stock price reaches the Pivot Point Zone.
Step 3: Wait until the price closes below or above the Pivot Point Zone.
Step 4: Input your trading position.
When a long trading position reaches a pivot point, the price bars should ideally make new lows, whereas when a short trading position reaches a pivot point, the price bars should touch figures above the pivot point.
For Short (Sell) Trading Position:
This trading strategy can put a stop-loss at the pivot point or the entry bar’s high/low. Though it depends on the market, you are trading in. A trader must use no specific orders for this trading strategy, though a limit order is preferred to protect traders from risk.
The trade automatically fills once you meet your desired trading price or hit the stop loss.
As per the market you are trading in, you can adjust the target to the next pivot point or change the stop loss to suit your trading limits.
The pivot point itself is the primary support and resistance when calculating it. This means that the most significant price movement is anticipated at this price. The other support and resistance levels are less influential, but they can still cause substantial price movements.
Pivot points are an excellent tool for identifying support and resistance areas, but they are most effective when combined with other types of technical analysis.
Pivot points are based on a simple calculation, and while they may be helpful for some traders, they may not be for others. There is no guarantee that the price will stop, reverse, or even reach the levels drawn on the chart. At times, the price will bounce back and forth between levels.
Open Demat Account &
Trade @ Rs15 per order.